28 October 2008

Land Value Tax - What is Value?

It's time for me to hold my hands up. When I've talked about different methods of valuing land for the purposes of LVT, whether it be self-assessment or taking house sale prices and deducting rebuild costs, I've made an assumption which, on reflection is not reliable. That assumption is that the sale price of land directly correlates to the rental price of land.

Both sale price and rental price are used within the current tax system. For instance, Council Tax is based on the assessed sale value of a house, whereas National Non-Domestic Rates are based on the assessed rental value of a commercial building.

The difference is important for LVT, because the charge is intended to be in proportion to the benefit the landholder is getting from having exclusive rights over a location at a given time, which, by definition, is its rental value. If the sale value does not directly correlate to the rental value then it is, a compromise valuation. I believe that there are examples where it could diverge significantly:

Consider two identical fields, A and B, used for agricultural purposes. I would expect them to attract the same rental price. Now imagine that field A is in an area where it is suspected that the local authority might give planning permission for a housing development, but field B isn't. Field A would have some speculative value, which would probably result in it having a higher sale price than field B, in spite of the fact that they both have the same rental value.

The very nature of sale prices means that they are also much more volatile than rental prices. In effect, the sale price of land is the predicted future rental values rolled up into a single payment. If there is an expectation that future rents will increase, selling prices can rise quickly on the basis of that speculation, while the current rental value remains relatively stable.

That isn't to say that rental price can't be derived from sale price, or that sale prices aren't an adequate proxy in the majority of cases, but I think it is important to acknowledge that they are not the same thing and allow for that when assessing any system of valuation.

I think this shows that one of the biggest problems with LVT is the name. "Land" can be misleading, as it can make people think of "soil" rather than "location" and "value" is ambiguous, as it isn't clear whether the value in question is the purchase price or the rental price. Maybe a term like "site rental value tax" would have been clearer. It would have certainly forced my thinking in the right direction.

27 October 2008

Is it Time to Privatise the Operation of the Motorways?

It seems that the bulk of the environmental movement has bought into the idea that socialist economics and its associated public ownership and control is the only way to achieve meaningful change, so suggesting a program of privatisation to them would probably be about as welcome as suggesting a dolphin harpooning holiday. I think that’s a shame, because in many cases, environmental problems are caused by the scarcity of a resource not being reflected by an accurate pricing mechanism, which is something that privatisation can introduce. One area which is ripe for this kind of change is the motorway network.

I could envisage the operation of the motorways being put into private hands using a model similar to railway franchising. The government could take bids for the opportunity to operate the network for, say, three years, with the operator free to set prices as they see fit, but obliged to return the roads in a good state of repair at the end of that time. The potential operators would have to calculate how much to bid based on their estimate of how much revenue they could obtain and the cost of maintenance. The amount of revenue the government would obtain from this would be substantial and would allow a major reduction in other taxes. The existing M6 Toll road was set up along these lines, with the builder of the road given the concession to operate the road for 50 years

The introduction of market economics would create effective road management. If the operator were to set prices too high, people would use other roads or other modes of transport. Set the price is too low and they wouldn't cover their costs and congestion would build. A closed motorway would mean lost revenue for the operator, so they would have a strong incentive to carry out road repairs quickly and at the quietest times. There would also be significant environmental benefits from introducing market-based pricing of long distance car travel.

I generally consider it much fairer and economically sensible for the government to obtain its revenue by charging for the use of common and public assets (oil drilling licences, pollution levies, land rent, etc.) than by arbitrary taxes which don't have any direct relation to the benefit being given (income tax, VAT, etc.). Privatising the operation of the motorways would fit into that model nicely.

I have to admit that instinctively it wouldn't be my prefered option; I still prefer the idea of using fuel duty as a way of charging for road use, because I value the anonymity it provides compared to direct electronic road pricing, but fuel duty suffers from the problem of being subject to so much political pressure to keep it low that it is unlikely ever to be set at the the same level as true market based road pricing. Fuel duty also suffers from the fact that it prices two separate factors, the first being the scarcity value and maintenance costs of road space and the second being the pollution caused by burning fuel. This creates the problems associated with agricultural fuels, which justifiably have a lower duty due to them not reflecting any road use costs, which then creates the potential for a black market in so-called "red diesel." Pricing road use separately from pollution would allow a single tier system of fuel duty to be used.

I'm much more comfortable with the idea of motorway franchising then I am with other road pricing schemes because the privacy issues aren't as severe. Firstly, the charging would be carried out by a private sector organisation, which would have a limited scope to use the data for surveillance purposes, as it would have limited access to data other than what it has collected itself, as opposed to the government, which would be able to cross reference the data with other databases. Secondly, as the charges would only be applied to motorways, it would still allow people to travel anonymously on ordinary roads, so long as other forms of vehicle tracking were not used on those roads.

On balance, I think motorway franchising may be the way forward.

24 October 2008

The Electricity Market - Another Situation Made Worse By Regulation

It seems that suggestions that the energy market is not sufficiently competitive and requires more regulation are becoming an almost daily event. It seems to be the same story as the banking sector; the industry is already heavily regulated, but it is assumed that any problems must be due to the regulation not being tough enough. The validity of the existing regulation is rarely questioned.

When I looked around to see what the suggested regulatory reforms might be, I came across an
interesting article on the Ecotricity website outlining what they perceive to be the major regulatory failings. Ecotricity is a smaller supplier (around 35,000 customers) which invests heavily in wind energy. It is this kind of supplier which could provide innovative competition to the "Big 6," so their opinion of what is stiffling the sector is probably worth taking into consideration.

What is interesting is that they highlight seven issues, three of which have been created directly by the regulator, which are:

  • The cash flow issue created by the requirement that suppliers offer a quarterly payment option. The regulation may have been written with the honourable intention of giving customers more choice, but it will clearly present a problem to new and smaller suppliers who may have less access to credit (per point 1), but have to pay up front. In trying to increase the choice of payment terms, the regulator could be reducing the choice of suppliers.

  • The burden created by the social requirements placed on suppliers, which ties in with the previous point a little. By forcing suppliers to offer a range of payment options and adminster energy efficiency programs, the regulations place a disproportionate burden on smaller suppliers compared to the larger players.

  • The length of contracts being limited to 28 days, which impedes the ability of suppliers to carry out reliable business planning and limits entry into the market, compared to industries such as broadband, where income can be secured over a longer period.
There seems to be a recurring theme whenever the government regulates a market, one of unintended consequences; they put requirements into place which will supposedly benefit the customer by increasing competition or creating greater choice, but they often end up doing the opposite by creating barriers to entry into the market.

21 October 2008

Land Value Taxation Without Valuation

As I've said previously, I like the principle of land value taxation (ideally paid out in full as a citizens' dividend). In discussions I've had with people who aren't convinced by the idea, the major concerns relate to the valuation methodology and the possibility that government corruption could skew the valuation process.

With a statistically based system, working from market data, I believe the potential for government manipulation of the system could be all but eradicated, but I recently came across a brilliant suggestion on Anti-Citizen One's blog which would go one step further and take the government out of the equation completely. The suggestion was to let the landholder produce his own valuation of the land.

Having read the suggestion, here's how I see it working. The government would set the LVT as a percentage of the sale value of the land. The landholder would then have to submit his own valuation saying how much he would be prepared to sell the land for, so if the tax rate was 2% and the landholder valued the land at £100,000 the annual tax bill would be £2,000.

Now, if you are looking at it like I did, you are probably thinking that there is a massive flaw, in that the landholder, unless he is incredibly honest, will value the land at £0. This is the where the next part of the system would come into play. If somebody offered the landholder his stated valuation, he would be obliged to sell at that price, so undervaluing the land he holds would put him in danger of having to sell the land for less than he is really prepared to.

The buyer would only be buying the right to exclusive use of the site, not the previous occupier's property, so the previous occupier would be free to take every brick and plant from the land and leave a completely bare site for the new landholder.

The government would have no involvement in the valuation process, the landholder would be entirely free to produce his own valuation of exclusive rights to the land and the system would ensure that his assessment is honest.

I suspect that this approach might be a bit too radical to introduce as a first step, but it could still be introduced as a back up to a system based on a more traditional valuation system. The government could set the rate of LVT and carry out the valuation, but if somebody felt their valuation was too high, they could set their own instead, on the understanding that they would be obliged to sell to anybody who was prepared to meet that valuation. As a first step I think that would be a good one.

Yet More Surveillance

There is an excellent piece by Cory Doctorow on BoingBoing about the government's attempts to force anybody buying a mobile phone to show their passport. This would enable the government to complete it's giant database of every phone call, email and website visit, by allowing them to tie every phone to an individual.

The whole idea that this is purely about serious crime or terrorism is clearly nonsense. As Cory points out, those people will simply buy an anonymous phone overseas and use it in the UK. Somebody else pointed out another obvious way around it, which is to steal somebody else's phone.

At first I was annoyed by the fact that this totalitarian government was trying to completely rob me of my freedom and privacy. Now I'm more annoyed by the fact they've become so arrogant that they don't even think they need to bother coming up with a half decent excuse to do it.

20 October 2008

More House Price Nonsense

Alex Salmond of the SNP always seems especially eager to eschew policies of substance in favour of soundbite populism. His latest move continues the trend.

He has announced that a shared equity scheme for first time buyers in Scotland will be extended, with the intention of enabling more young Scots to get on the property ladder. Coming from a man who was an economist before becoming a politician, it is an absolutely ridiculous policy decision.

Affordability will improve without these interventions, because house prices are falling anyway. By pumping more money into the housing market, the SNP will prop up the underlying house prices. That might not be particularly bad news for those that can get an equity share arrangement, but for those that can't, things will be worse than they would have been without the scheme, because they will find it harder to afford the house prices that the government is artificially inflating.

In the long run, this kind of equity share approach is completely counter productive, because the way it forces house prices up results in the government having to pump more and more money into the scheme to maintain the very affordability that the scheme itself is harming.

You've also got to seriously question the wisdom of the government taking a stake in an asset which is currently falling in value and is predicted to continue falling for some time.

Let's also not forget that one of Salmond's pet policies, the local income tax, will also have a major impact on affordability. By removing council tax and thereby reducing the cost of holding domestic property, it will increase the demand for houses and push prices up. There was a spike in house prices when domestic rates were abolished in favour of the poll tax and exactly the same effect will play out with local income tax.

In short, if Alex Salmond wants to improve the affordability of housing in Scotland, he should do exactly the opposite of almost everything he is doing now. Unfortunately, his current policies make for good soundbites, so I wouldn't expect that to happen.

18 October 2008

Joined Up Government?

The government is continuing to push for universal mass medication by fluoridating all water supplies. It seems to be be gaining ground in Greater Manchester, as seven of the ten local health trusts are working to produce a fluoridation plan.

When the scheme was first mooted, one Greater Manchester Labour MP, Hazel Blears, dismissed concerns about the ethics of mass medicating the population without each individual's explicit consent by saying:

"those who remain adamantly opposed would be able to use water filters that remove fluoride or buy bottled drinking water"

That statement seems to be a little bit at odds with one made by another Greater Manchester Labour MP, Phil Woolas, who gave his support for a campaign to get people drinking more tap water by saying:

"There are more than a billion people in the world without access to safe water, and yet, here we are with pure water on tap, buying it in bottles - I believe it's morally indefensible"

So, the message from our joined up government seems to be that if you choose not to consume fluoride, you are doing something morally indefensible.

17 October 2008

Shared Space in Manchester

Warren Marshall, the Urban Design and Conservation Manager at Manchester City Council, retired earlier this month. I've never met the man, but I'd like to applaud him for one particular piece of work he did during his career - the redesign of the area around St Ann's Square in Manchester City Centre.

I'm a big fan of the shared space approach pioneered by Hans Monderman in The Netherlands, which removes the separation between road and pavement, by, among other things, lowering curbs so that the road and pavement are on one level, removing barriers between the two and removing most road markings and traffic lights. The approach has proven to be successful at reducing accidents. That might be counter-intuitive to many, when we are used to being separated and controlled for our own safety, but it seems that when you stop people relying on the layout of the road to keep them safe, they start to pay more attention to what is going on around them and take more care.

The area around St Ann's Square isn't a pure shared space scheme (there are too many bollards for a start), but it does have some of the key features, such as the pavement not being raised up above the level of the road and the unusual features separating the road from the pedestrianised areas next to it, such as the large stone balls on the right of the picture.

The area has a much more pleasant feel than the ordinary roads surrounding it. There never seems to be any conflict between drivers and pedestrians, in spite of the fact that pedestrians tend to walk straight down the middle of the road. That lack of conflict seems to exist because nobody has any sense that they have priority, so instead of people angrily demanding that others get out of what they perceive as their part of the street, people silently and politely accommodate each other.

The way this has been achieved in one of the busiest parts of a major city is impressive and I imagine it wasn't been an easy scheme to put in place, so thanks for your work, Mr Marshall and enjoy your retirement.

14 October 2008

Economic Myopia - Part 2

The government's response to the banking crisis just gets more ridiculous.

They've spent weeks berating the banking industry for being irresponsible and taking excessive risks; Gordon Brown told the UN in no uncertain terms that it was time for the end of the age of irresponsibility.

It seems that the banks are doing exactly what was being demanded of them and have entered a phase of re-evaluation. It is obvious house prices are over inflated and indebtedness is unsustainably high, so the banks are backing away from lending more money until the underlying risks become clear.

So, is the government standing together as one to welcome this new age of caution and responsibility? Of course not! The Treasury Select Committee has criticised the banks for not being hungry for business and not doing enough to support the housing market.

We've passed the top of the land price cycle and we're entering a recession, so house prices are falling while unemployment is rising. Of course lenders aren't hungry for mortgage business at the moment. If they were, they'd be idiots.

To use my analogy from yesterday, the approach the government is taking is like criticising brewers for selling to alcoholics, but pushing them to keep supplying anyway, so we don't end up with large numbers of alcoholics sobering up and suffering with bad hangovers.

13 October 2008

Removing Depositor Guarantees Would Mean Cheaper National Debt

In a previous posting, I gave reasons why removing the guarantee on deposits in banks would go a long way to resolving the problems that have caused the current banking crisis.

There is a pleasant side effect that removing depositor guarantees would also create, which is that it would make servicing the national debt cheaper. I'll explain why:

At present, the UK government carries debts of in excess of £500billion. In the ideal world, the government wouldn't carry that debt; it amounts to over £8,000 per person in the UK and it is an irresponsible way to operate a government as it allows the cost of todays spending to be passed on to future generations. Unfortunately, we aren't in the ideal world and that level of debt won't go away overnight, so while we have it, we need to find a way to fund it as cheaply as possible.

Around £84billion of that debt is funded by people investing with National Savings & Investments (according to their annual report), through products such as premium bonds. NS&I should have a strategic advantage over private sector banks, as somebody investing in NS&I is lending money to the government and therefore has a government guarantee of repayment. Unfortunately, the government throws this advantage away by guaranteeing some investments in private sector banks too, even though the government isn't the borrower.

If the government removed the guarantee on private sector bank deposits, the advantage would materialise. People would see the risk in banks and demand higher interest rates from them. On the other hand, NS&I would be able to use its government guarantee as a major selling point and reduce its interest rates, knowing that it would be the only port of call for investors looking for safety.

Economic Myopia

Just when I thought the government couldn't find any more ways of fouling up the banking system, they go and prove me wrong. As part of the plan to bail out RBS and Lloyds TSB/HBOS, the government has announced that it has made these banks commit to:

"maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels."

The wisdom of maintaining high levels of lending to small businesses is debatable. The wisdom of maintaining high mortgage lending isn't; it's just plain stupid.

The reason mortgage lending has dried up is that house prices have increased far faster than income levels, driven by cheap credit and they are now unaffordably high, causing mortgage defaults to rise. House prices are falling as part of a natural correction. Trying to force people to take on more debt in order to keep a debt driven house price bubble growing, when people are struggling to service the existing debt, is clearly going to create bigger problems. It's a bit like trying to keep a pyramid scheme going by pushing more people into it; it might work in the short term, but eventually it will crash and the longer it takes to happen, the worse the crash will be.

By adding in the requirement that mortgages should be "competitively-priced," the government has made it even worse. One of the reasons that the banking crisis has been so bad is that mortgages were priced far too cheaply. Many banks foolishly assumed that house prices and income levels would continue to grow smoothly and constantly and perceived the credit risks associated with mortgage lending to be almost non-existent. This pushed lending margins down and left banks horribly exposed to increased defaults and reductions in house prices. These government funded banks need to ensure that their mortgages are realistically priced for risk before they even consider competing against other banks, which might be setting their interest rates too low to cover the risks they are taking.

In reality, I expect the opposite will occur and the government backed banks will price much lower than the fully private sector banks, which I expect to restructure their mortgage portfolios, by increasing interest rates to more accurately reflect risk and push their less attractive customers elsewhere. RBS and LloydsTSB, with their obligation to maintain lending levels, will probably be forced to acquire these customers by the government. The end result will be that the majority of banks will restructure and stabilise their portfolios, while the taxpayer will be left with a large stake in two banks holding large amounts of junk debt. What happens then is anybody's guess.

The strategy that the government is pursuing is comparable to using taxpayers' money to put pressure on a section of the brewing industry to continually increase production of lager, keep prices low and sell aggressively to alcoholics, in order to ensure that they don't sober up and suffer from a nasty hangover. It might satisfy some short term goals, but in the longer term, it will achieve nothing.